We’ve long heard that the housing market recovery suffers from a shortage of first-time buyers, and that the long-term outlook for housing largely hinges on their return.

This view was backed by economists who participated in a panel on Monday at the National Association for Business Economics annual meeting, held in Chicago. But panelist Ivy Zelman suggested that first-timers may be starting to come back.

For one, first-time buyers made up 52% of those who purchased a home with a mortgage in the third quarter of this year, said the chief executive of real-estate research company Zelman & Associates, citing combined statistics from Fannie Mae, Freddie Mac and Ginnie Mae.

It’ s important to note the percentage of first-time buyers looks less impressive when all home sales are considered, since that also accounts for cash sales. In August 2014, only 29% of all buyers of existing homes were first-timers, according to National Association of Realtors data. For comparison, between October 2008 and October 2010, an average 41% of all buyers of existing homes were first-timers, David Crowe, chief economist for the National Association of Home Builders, pointed out during the panel discussion.

Still, the purchase activity of home buyers younger than 30 who bought with a mortgage (with the intent to live in the home) rose 8%, year over year, in 2012, according to a Zelman & Associates analysis. Purchase activity for this group rose 10%, year over year, in 2013. And purchase activity rose 19%, year over year, in both 2012 and 2013 for those between the ages of 30 and 39.

“After refis plummeted [due to an uptick in mortgage rates], there was a void and a capacity that mortgage companies wanted to fill,” Zelman said. But many people don’t realize that it’s getting a little easier to obtain a mortgage. “As far as they’re concerned, the mortgage market is closed. But the narrative is starting to change.”

In the coming years, as the youngest millennials turn 30, there should also be more demand for single-family housing, she said. While it’s true that people are delaying marriage and kids — and thus many times also delaying the purchase of their first single-family home — they won’t delay forever. Most mothers will have a desire to own a home with a yard for their growing families, Zelman said.

Effect on home building

An increase in first-time buyers can’t come quickly enough for the home building industry.

Throughout the 1990s and up until about 2005, new homes made up 16% of total sales, Crowe said. By comparison, in 2013, new home sales made up 8.8% of all sales. Move-up buyers are often able to buy a new home when a first-time buyer purchases their starter home, he explained.

Moreover, today’s first-time buyers are more likely to buy homes that are vacant due to foreclosure, he said. Because the former owners have left already, the sale doesn’t trigger another sale.

According to a recent Gallup poll, more Americans are beginning to view real estate as a viable long-term investment. Thirty percent of those surveyed early last month took this view, up from 25% just a year ago. Gallup credited an improving housing market as being the chief driver of the change in popular opinion on this matter.

But, wait. Some experts, notably Yale economics professor Robert Shiller, disagree heartily with this view. In interviews over the past couple of years, Shiller referred to his research in which he studied home price appreciation from 1890 to 1990. He found that, considering costs of construction and inflation, homes really didn’t appreciate in value at all. Does that mean that buying a home is a lousy move? Not at all, and here’s why.
How do you define “investment”?

According to Investopedia, an investment is the purchase of an asset “with the hope that it will generate income or appreciate in the future”. Therefore, you may purchase a single-family house with the hope that it will appreciate, and it becomes an investment. Whether it is a good investment, of course, remains to be seen. Buying a duplex, by this logic, would qualify as a good investment, due to the ability to rent one side, therefore generating income, while living in the other.

But what if, as Shiller has suggested, you forgo buying altogether, and rent? You could then take the amount of a home’s down payment and invest it in another vehicle, such as stocks. Currently, the S&P 500, for instance, has returned an average of 7.3% over the past 10 years.

Due diligence is key:
That sounds a whole lot better than the 0% return on housing that Shiller refers to, doesn’t it? But that scenario presupposes that you leave that money alone for the long term. Buying and selling at the wrong time can cost you big time, and, according to recent data, most people hold onto stocks for only around six months. Many buy high and sell low, eroding returns.

The same goes for housing, as those who became caught up in the foreclosure crisis can attest. Even the investment property scenario can sour quickly if you pay too much for the property and cannot secure a high enough rent to cover your expenses.

Buying a home is, like any investment, deserving of thoughtful due diligence. After all, you have to live somewhere, and paying rent is not an investment of any sort. At least those monthly mortgage payments will net you an asset that you will eventually own free and clear. If you plan ahead to pay off your home loan before retirement in order to reduce expenses, your residence becomes an integral part of your long-term retirement plan, as well.

Interestingly, the Gallup poll respondents who were most likely to say that buying real estate was a good long-term investment were those who owned their own homes – proving that home ownership can be – and often is – a great investment.

Tara-Nicholle Nelson, Trulia – September 27th, 2013
Buyers are sometimes stunned at the number of potentially life-changing decisions and choices they are required to make over the course of a house hunt. This neighborhood or that one? Condo or single family? Fixer or move-in ready? Is that the right house? How much to offer, and on what terms? When to make an offer? Whether to remove contingencies? And that’s just the short list.

But one of the most basic decisions real estate consumers ever make is the most impactful one, and it’s often one they make before they have the benefit of our expertise: whether to rent or to buy their home.

We recently released what has been called the most sophisticated Rent vs. Buy calculator ever – you can work with it and experiment with some of the inputs your average buyer client would likely use here. The calculator allows smart would-be buyers to understand the many economic factors that influence whether it is cheaper to rent or to buy in their area and more importantly, in their personal situation, including line items like: • how long you intend to stay in the home

When buyers do come to you with assistance on the rent vs. buy decision, you might find the calculator helpful in showing them how their personal life and financial factors change the equation, and helpful in putting together an action plan that takes them to ready-to-buy with increased savings or a more conservative purchase price.
The calculator also makes it incredibly simple for you to help clients understand alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that they plan to stay in the home.
We asked our Chief Economist Jed Kolko to help us understand the math – and the myths – around the rent vs. buy cost factors nationwide. Here’s what he had to say:

MYTH: Rising home prices and mortgage rates make it more expensive to buy than to rent.Fact: Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting.
The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.
The key reason buying is still cheaper than renting is this: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

MYTH: The mortgage interest deduction is the only reason home ownership is more affordable than renting.Fact: A key factor affecting the rent-versus-buy math is whether you itemize deductions on your income taxes and what tax bracket you’re in. If you itemize, you can deduct mortgage interest payments (not principal payments) and property tax payments from your income before calculating how much you owe in taxes. That said, only 33% of tax filers choose to itemize. Itemizing lowers the cost of buying relative to renting – especially if you pay taxes at a higher rate, because that means you’re deducting more.
But buying remains cheaper than renting almost everywhere even if you don’t itemize. Without itemizing – or if your tax situation means you get no benefit at all from itemizing – buying looks 22% cheaper than renting nationally. And buying still beats renting in 97 of the 100 largest metros – everywhere but San Jose, San Francisco, and Honolulu, even without assuming that the buyer will itemize their taxes and use the mortgage interest deduction.
Itemize at 25% (baseline assumption) Do not itemize
Cost of buying versus renting nationally
Note: Negative numbers indicate that buying costs less than renting. -35% -22%
Metros out of 100 where buying cheaper than renting 100 97
What is the national mortgage rate “tipping point” 10.5% 7.5%

MYTH: The increase in home prices, which is hyperlocal, will be the tipping point in making renting a home cheaper than buying, in most areas.Fact: Actually, the biggest factor narrowing the gap between the cost of buying and the cost of renting is rising mortgage rates – which affect the entire country. In fact, the benefit of buying relative to renting shrank in nearly all of the 100 largest metros over the past year: only in Springfield, MA did the gap widen, from buying being 47% cheaper than renting last year to being 49% cheaper than renting today.
Nationally, rising mortgage rates account for about 8 points of the 10-point shift from buying being 45% cheaper than renting one year ago to being 35% cheaper now. The other 2 points are due to prices rising faster than rents. (How did we figure that out? If you used today’s prices and rents in the rent vs. buy calculation but used a 3.5% mortgage instead of a 4.8% mortgage, buying would be 43% cheaper than renting – 2 points less than last year.)

Because fluctuating mortgage rates can affect the rent versus buy math, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates keep rising, San Jose will tip first in favor of renting, at 5.2%. Already today, at 4.8%, buying is just 4% cheaper than renting in San Jose. The tipping point is below 6% in San Francisco and Honolulu as well, and below 8% in New York, Los Angeles, and seven other major metros.